Stimulus Check – U.S. Treasury rule on stimulus funds adds fuel to state tax cut dispute
CHICAGO, May 12 (Reuters) – U.S. Treasury guidelines for spending billions of dollars in federal stimulus funds could further antagonize states seeking to cut taxes this year, according to analysts.
Guidance released on Monday fleshes out the do’s and don’ts for tapping $350 billion flowing to states, cities and other governments from the $1.9 trillion American Rescue Plan Act (ARPA) passed in March. read more
That act includes a prohibition against using the money to subsidize new state tax cuts, which has already led to constitutional challenges in federal courts from 18 largely Republican-controlled states.
Missouri’s case was dismissed this week, while Ohio’s motion to temporarily block that prohibition was denied, although its lawsuit was found to have “a substantial likelihood of success” to some extent.
Emily Swenson Brock, director of the Government Finance Officers Association’s Federal Liaison Center, said the Treasury’s interim final rule heightens oversight of how states record expenditures of the stimulus funds every year.
“This definitely added fuel to the fire,” she said.
Jared Walczak, vice president of state projects at the Tax Foundation, said the rule impinges on states’ fiscal authority.
He pointed to a stipulation that spending reductions cannot occur in any department or agency where a state has spent stimulus funds.
“The federal government can adopt guard rails to ensure that states don’t backfill their own spending reductions with federal aid dollars and use the savings to adopt tax cuts, but by imposing restrictions at a department level, the Treasury rule functionally makes almost all spending cut-financed tax reductions off limits,” he said.
In addition to spending reductions, states can demonstrate that money lost to tax cuts was offset by policies enacted to raise revenue from other sources or through higher revenue due to economic growth, according to the guidance. If not, states must pay back COVID-19 aid funds in the amount of their tax cuts.
A U.S. District Court judge on Tuesday dismissed Missouri’s lawsuit against U.S. Treasury Secretary Janet Yellen, saying it was filed prematurely as the state has yet to suffer any harm.
A spokesman for Missouri Attorney General Eric Schmitt said potential options were being reviewed, including a motion to reconsider the ruling.
Another federal judge on Wednesday found that Ohio is “currently suffering irreparable harm,” but denied the state’s motion for a preliminary injunction on the basis it was not needed at this stage in the litigation.
“The trial court here agreed with our core argument: the federal government does not have the right to tell the states what to do with its tax policy,” Ohio Attorney General Dave Yost said in a statement.
Reporting by Karen Pierog in Chicago
Editing by Alden Bentley and Matthew Lewis
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